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Drops in demand, increasing costs to chop airline profits

Rising fuel costs will be the main culprit cutting into US airlines' profits this year, with credit market turmoil and slowing passenger demand also expected to hamper the industry worldwide.

High jet-fuel prices will limit US airlines' combined profitability to between US$3.5 billion and US$4.5 billion this year, compared with last year's estimated profit of US$5 billion, the Air Transport Association said on Friday. Meantime, the International Air Transport Association, which anticipates profits for domestic and foreign carriers to fall to US$5 billion from US$5.6 billion, called signs of weakening passenger demand a "warning bell" for this year.

To bolster their finances in the face of a slowing US economy, more expensive fuel and higher borrowing costs, US-based carriers must continue to improve fuel and other efficiencies while increasing their share of business and international travel, said ATA Chief Economist John Heimlich.

Higher fares also seem likely.

A spokeswoman for United Airlines on Friday said the second-largest US carrier raised domestic fares by US$10 to US$20 round-trip to offset rising fuel costs. The move is the latest in a series airlines have attempted in recent months as the price of jet fuel has soared.

Shares of major carriers were pummeled last year with big drops coming at the end of the year, as oil prices climbed toward US$100 a barrel -- a threshold broken earlier this week.

"Rising oil prices have a disproportionately negative impact on US carriers, since oil is traded in dollars," Heimlich wrote in an e-mail. "Foreign carriers generally have more robust hedge positions than US carriers, leaving them less exposed to the soaring oil prices."

Shares of American Airlines' parent AMR Corp finished down nearly 60 percent at US$13.35 on Dec. 31, while United parent UAL Corp dropped about 32 percent to close at US$31.75.

On Friday, AMR closed down US0.14 to US$13.21. UAL rose US$1.40, or 4.4 percent, to US$33.15, despite hitting a new annual low of US$29.46 in earlier trading.

British Airways shed about 43 percent on the London Stock Exchange last year, while Air France KLM lost 23 percent on the New York Stock Exchange.

Despite the expected decline in US carriers' profitability, this year's profit would mark the industry's third straight year of profit, which has not happened since 1998 to 2000 and would follow a five-year combined loss of US$35 billion, Heimlich said.

The outlook, however, is less rosy.

"We ring in 2008 with a warning bell," IATA chief executive officer Giovanni Bisignani said in a release, pointing to concerns ranging from high oil prices to the global credit crunch.

"Passenger demand growth is expected to fall to 5 percent. And the expected increase in freight demand growth to 4.3 percent will only help us recover some of the ground lost against sea shipping," he said.
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